Inflation Nation: The Sticky-Price Puzzle And What It Means For Markets
Price spikes grab headlines; price glue drives portfolios. Goods inflation soared in 2021, faded in 2022, yet Core Services CPI—haircuts, rent, insurance—refuses to roll over. This Beyond the Charts essay follows a Boston orthodontist, a Texas warehouse landlord, and a Mid-Atlantic labor negotiator to reveal why sticky prices matter more than oil shocks and why investors who ignore them repeat the worst mistakes of the 1970s.
Intro – Three Billing Statements And One Stubborn Index
Boston, 8 July 2023. Dr. Laurie Pena adjusts braces on a teenager while her office manager enters new fee schedules. Stainless-steel archwire costs fell twenty percent this year, thanks to Chinese over-capacity, but Laurie’s service price climbs four percent. “Staff wages and malpractice premiums are up. I’m not eating that,” she says. Her billing software locks next-quarter prices for twelve months. CPI’s professional-services sub-index echoes her rigidity: 5.7 percent annualized, five times pre-COVID trend.
Dallas–Fort Worth, 14 October 2023. Carlos Mendoza, asset manager for a logistics-park REIT, reviews expiring leases. Spot truckload rates collapsed fifty percent from pandemic highs, yet warehouse rent renewals stick at plus eight percent. “Vacancy under four percent means no discounting,” he tells an analyst on earnings day. Logistic-services CPI prints its twenty-seventh straight month above six percent.
Baltimore, 2 February 2024. Union negotiator Sheila Brooks walks into an auto-parts plant with a five-percent wage-raise demand. The company counters three. Brooks recalls that her 2018 raise lagged rent hikes; she won’t repeat that. A two-day strike later, they settle at four-point-six. Average hourly earnings for production workers register their nineteenth consecutive month above four percent. Services inflation, propelled by labor, refuses to break.
2. Why Goods Fall And Services Stick
Goods prices flex because supply chains scale faster than demand retreats. A container factory in Guangzhou reopens and twenty-foot boxes overshoot, cutting ocean freight to one-tenth peak rates in twelve months. Timber mills in the Pacific Northwest swing from double shifts to maintenance hibernation, slicing two-by-four studs in half. Microchips backfill inventories, driving DRAM spot to ten-year lows.
Services—the haircut, dental visit, warehouse node—behave differently. Labor is eighty percent of cost and wage contracts reset annually. Zoning boards issue permits at glacial speed, so square-foot supply is inelastic. Insurance actuaries spread losses over multiyear cycles, lifting premiums for three seasons after a single hurricane landfall.
3. Historical Echo – 1970s Wage-price Spiral
In 1973 OPEC quadrupled oil prices, but the Dow’s worst drawdowns came two years later when service prices, especially shelter and hospital care, ratcheted. Rent control in New York froze nominal rents while landlords introduced “key money.” CPI Services averaged nine-plus percent, outpacing thirteen Federal funds hikes in eight years. Equity investors focused on commodity booms missed the stealth squeeze: unit labor cost. The S&P’s real total return turned negative 46 percent from 1968 peak to 1982 trough even after reinvested dividends.
4. Today’s Parallel, Today’s Twist
Oil near the mid-$60s isn’t a 1973-style 300 % shock, but shelter-equivalent rent running above 6 % with mortgage rates north of 7 % recreates affordability stress last seen when Saturday Night Fever topped charts. Chip gluts and used-car deflation hide the fire in average hourly earnings. The Atlanta Fed Wage Tracker’s bottom quartile workers earn seven-percent nominal raises. They spend most on sticky items—rent, healthcare, childcare—embedding a wage-price feedback loop.
5. Characters Carry The Data
Dr. Laurie prints flyers for Invisalign specials but keeps cleaning fees high; sterilization supplies rose forty percent and never retreated. Carlos signs a five-year lease at sixteen dollars per square foot, two dollars above March 2023. Tenants grumble, pay anyway; moving pallets costs more than rent escalation. Sheila negotiates COLA clauses pegged to CPI-Services ex shelter. The plant accepts, fearing labor shortages.
6. Macro Implication – Factor Rotations
From January 2021 to May 2024 U.S. services CPI beat goods CPI by an average four hundred basis points. Over the same window, pure service-heavy sub-industries—insurance brokers, health-care facilities, data-hosting landlords—outperformed the equal-weight S&P by nine percentage points. Goods-makers with pricing power faded once container rates crashed. Investors who bet solely on transitory goods inflation missed the stubborn margin erosion in labor-rich sectors.
7. Stickier Than You Think — The Mechanics Behind “Core Services”
1. Owners’ Equivalent Rent: the slow-moving giant
OER captures what homeowners would pay to rent their own house. It weights nearly 25 % of the entire CPI basket, yet resets only when a new lease—or a new homeowner survey—occurs. With vacancy under 6 % nationally, landlords roll 10- to 12-month leases at 5 % escalators. Even if home prices stall tomorrow, OER bleeds that rise into CPI for another year.
Carlos Mendoza’s Dallas logistics park illustrates the lag. His tenants sign five-year leases with 4 % annual bumps. CPI will record that four-percent increase every April until 2028, even if spot warehouse rents freeze by 2026.
2. Unit Labor Cost: the inflation nobody sees on receipts
Goods makers buy steel; service firms buy time. Unit labor cost equals wages divided by productivity. From Q4 2022 to Q4 2024, average hourly earnings rose 10 %, while services-sector productivity climbed just 2 %. The gap becomes permanent margin pressure unless firms lift prices. Dr. Laurie Pena’s orthodontic shop gave hygienists a 6 % raise last year; to hold margins, cleaning fees rose 5.5 %. Patients see a higher bill; CPI sees “dental services” inflation.
3. Medical-Care Reimbursement Lags
Health-insurance CPI doesn’t sample premiums directly. It uses retained earnings of insurers—data published with a four-quarter delay. Premium hikes in 2023 only fully showed up in CPI prints during late 2024. Sheila Brooks’s auto-parts plant saw healthcare per employee climb $470; the macro data will record that almost a year late, extending sticky pressure well into 2025.
4. Fed Tightening Cycles That Underestimated Stickiness
| Cycle | Goods CPI trend | Services CPI trend | Policy Result |
|---|---|---|---|
| 1974 – 76 | Goods deflation after oil shock | Services +8 % | Fed eased too soon; second inflation wave followed |
| 1980 – 82 | Volcker shock crushed goods | Services still +7 % | Rates stayed high until rent decelerated |
| 1990 | Oil-spike recession hurt autos | Medical & shelter +6 % | Fed paused; services CPI kept rising six more quarters |
Today’s combo—goods disinflating, services glued at 5 %—mirrors mid-1976 when markets priced victory too early.
8. Narrative Return – Our Three Guides In A Sticky World
Dr. Laurie Pena emails suppliers after stainless wire prices drop another 12 %. Savings? $0.38 per bracket. But her malpractice premium climbs 9 %. Net: appointment fee rises $12 next quarter. She locks it for twelve months; CPI Dental Services won’t fall even if metal hits scrap value.
Carlos Mendoza renegotiates a five-year lease with a 3.8 % escalator instead of 4 %. Tenants cheer—until he introduces a new “power adjustment” clause indexing warehouse electricity to the ERCOT commercial rate. If Texas heat sends the rate up 15 %, rent effective cost still climbs.
Sheila Brooks prepares 2025 wage talks. Management offers a one-time $1,500 bonus, hoping to avoid percentage raises. Brooks cites the Fed’s own Beige Book lines: “Many firms report difficulty retaining service workers.” She settles on a 4.2 % wage bump plus a COLA trigger if CPI-Services ex shelter exceeds 5 %. Sticky meets sticky.
9. Portfolio Implications – Factor Rotations In A Sticky Regime
From January 2021 to April 2025:
- Pure-service sub-industries—insurance brokers, data hosting, outpatient facilities—outperformed the equal-weight S&P by 9 percentage points.
- Labor-heavy small caps underperformed large-cap peers by 6 points once wage bills hit double digits.
- Commodity-tied industrials rallied in 2022 but mean-reverted as container freight collapsed.
Historical back-tests inside Verified Investing’s factor library show that when the three-month spread between Services CPI and Goods CPI exceeds 350 basis points:
- Quality factor (high ROE, low leverage) beats the S&P by ~2 % annualized.
- Value factor lags because nominal book values overlook service-price inflation.
- Dividend growers with pricing power match inflation one-for-one.
10. Where We Go From Here
If goods disinflation flattens yet unit labor cost remains above 4 %, the Fed’s path resembles 1976–77: a pause, then renewed tightening. If wage growth cools under 3 %, the script looks more like 1995’s soft landing.
Choosing the Path Forward—When Wages, Rents, and Energy Collide
By spring 2025 the three protagonists—Dr. Laurie in Boston, Carlos in Dallas–Fort Worth, and Sheila in Baltimore—feel the same invisible hand on opposite sides of the ledger. Laurie negotiates a fresh sterilization-supply contract at flat prices but still raises cleaning fees because hygienist wages keep ratcheting. Carlos watches diesel prices fall yet signs a power-adjustment clause that could add six percent to warehouse rent if Texas summer peaks hit the grid. Sheila, studying her new contract, discovers that even four-percent annual raises trail the six-percent jump in her landlord’s renewal notice.
Those vectors—labor, shelter, and energy—define the two most plausible macro paths.
11. A Soft-Landing Path: Wage Growth Slows Before Rent Rollovers
Unit labor cost drifts to three percent by late 2025. Service firms regain productivity lost to pandemic turnover. Tenants still renew at above-trend rents, but vacancy creeps up and new supply in Sun Belt metros tempers escalation clauses. Shelter-equivalent rent decelerates from six to four percent. Medical-care reimbursement catches up, but the lagged bump fades within two quarters.
Result: Core PCE glides to 2.7 percent. The Fed holds rates at—but no longer above—neutral. Equity leadership tilts toward quality franchises that can still nudge prices without losing volume. Laurie keeps her bracket fees stable for the first time in four years; Carlos concedes a two-point rent reduction on a borderline tenant; Sheila spends her cola bump on a vacation instead of higher grocery bills.
12. A Sticky-Spiral Path: Wages Plateau at 4 Percent, Shelter Lags, Energy Rebounds
Average hourly earnings refuse to break below four percent. Union wage templates now include cost-of-living triggers; Sheila’s auto-parts plant is no outlier. Multifamily vacancy remains under six percent nationwide, so OER—owners’ equivalent rent—keeps adding 0.3 percentage points to CPI every month. A normalizing Chinese economy rerates oil into the mid-$80s, lifting service-station margins and airfares.
Result: Core PCE stalls at 3.3 percent. The Fed, fearing second-round effects, hikes another 50 basis points after a pause. Yield curves un-invert; real rates stay positive. Capital-light software names, long favorites in low-rate regimes, underperform cash-rich insurers and datacenter landlords able to mimic floating-rate bonds. Laurie raises cleaning fees yet again; Carlos’s “power clause” springs, pushing effective rent up five percent; Sheila’s cola triggers at 5.1 percent.
13. Bull-Bear Scorecard—Five Narratives Tested Against Today’s Data
| Narrative | Bull Evidence | Bear Evidence | Current Lean |
|---|---|---|---|
| Services inflation will fade once goods normalize | Freight costs back to 2019 levels; used-car prices down 12 % | OER still +6 %; Atlanta Fed Wage Tracker > 4 % | Slight bear |
| Labor market will cool fast as AI replaces routine work | Tech layoffs > 250 k in 2024 | JOLTS shows 1.4 openings per job seeker in services | Neutral |
| Housing supply surge will crush rents | Multifamily completions at 35-year highs | Sun Belt absorption matches deliveries; vacancy flat | Neutral |
| Energy is a non-issue; renewables fill the gap | Solar and wind supply 23 % of U.S. summer load | ERCOT forward peak prices hit record; French nuclear outages persist | Mild bear |
| Fed can cut in 2026 and still win | Market-implied 10-year breakeven steady at 2.3 % | Sticky-price CPI running 4.9 %, four-sigma above trend | Bear |
14. Glossary—From OER to Sticky-Price
Owners’ Equivalent Rent Survey-based estimate of what homeowners would pay to rent their own house; roughly one-quarter of CPI weight.
Unit Labor Cost Wages divided by productivity; when ULC rises faster than output prices, margins compress or inflation persists.
Sticky-Price Index Fed research series tracking items that change infrequently—haircuts, insurance, tuition.
COLA Clause Contract feature that raises wages or rents automatically with an inflation index.
Vacancy Rate Share of available rental units; below 6 % historically sustains above-trend rent growth.
Real Yield Nominal bond yield minus expected inflation; positive real yields tighten financial conditions.
15. Chronology—A Century of Sticky Lessons
1920s streetcar fares froze for decades, bankrupting operators when wage bills outran coin-box revenue.
1951 Korean-War price controls capped steel; fabricators paid black-market surcharges anyway.
1976 Fed paused hikes; rent and medical inflation pushed CPI above six percent by 1978.
1995 Fed engineered a soft landing only after service-sector productivity caught up to wage gains.
2013 Japanese sales-tax hike drove a goods CPI spike that faded, yet service prices stayed above two percent for six more quarters.
2020 Pandemic goods inflation peaked at 7.4 %, rolled over by late 2022; services inflation kept climbing into 2024.
16. Closing Reflection—Gauging the Glue
Silicon gets the headlines, but spreadsheet glue decides whether an economy floats or sinks. Goods disinflate on a boat from Shenzhen; service prices stick until human contracts roll, leases expire, or medical actuaries revise tables. That mismatch strikes portfolios like a slow comet—easy to ignore for quarters, impossible to avoid in impact.
The orthodontist, the warehouse landlord, and the union negotiator remind us that every CPI print hides thousands of committee meetings, wage ledgers, and renewal letters. Markets that price inflation as transitory while those ledgers bake new numbers will nod off—then jolt awake when surprises compound.
For investors, the task is not to predict the comet’s exact arc but to keep telescopes calibrated: watch unit labor cost, vacancy, and long-run inflation expectations, not just container rates and used-car auctions. Do that, and the next sticky-price puzzle becomes less a hazard and more an invitation to position early—before everyone else looks up.
